TPG's spectrum surprise

The digital dividend auction has come and gone and it looks like the “red underpants” are now firmly atop the head of communications minister Stephen Conroy. However, the real surprise isn’t the fact that the final figures have fallen short of Conroy’s expectations but rather the move by TPG to secure spectrum at 2.5 Gigahertz.

The likes of Telstra and Optus were always going to be in the running to pick up the 700 Megahertz spectrum, although the high reserve price has clearly proved to be a deterrent. But what does TPG, Australia’s largest mobile virtual network operator, want to do with its share of 2.5GHz spectrum?

TPG has more than 600,000 broadband customers and is already a mobile reseller (through Optus) with 300,000 subscribers, and its boss David Teoh has a reputation for sharp deal making. The fixed broadband player has also consistently been in the frame when it comes to prospective deals – there was a lot ink spilt on a possible move to buy iiNet last year and TPG was also in the mix to pick up Leighton’s telco holdings.

So could the spectrum buy be a precursor to a bigger play, one that cements TPG as Australia’s fourth mobile network operator? Well, that may be a touch too ambitious at this point but it’s still a great buy for Teoh, who might have something more realistic in mind.  

TPG certainly hasn’t broken the bank with the purchase, paying $13.5 million for 2x10MHz in the 2.5GHz band, which was on the block for a far more palatable price of three cents per MHz POP. That’s not enough to start spinning grand designs about becoming a fourth major player but it’s just about right to serve as a valuable bargaining chip.

Independent telco analyst Chris Coughlan is convinced that there is absolutely no place in the market for a fourth mobile player. According to Coughlan, TPG has bought itself some real estate to enhance its corporate offerings and perhaps squeeze a better wholesale agreement out of its partners.

The spectrum will provide TPG ample scope to provide its fibre-connected corporates with fixed-wireless redundancy. It also opens up an opportunity to explore niche narrowband services, again bolstering its offering to corporates.

Others, however, are a bit more bullish about TPG’s intent. Ovum’s Nicole McCormick says the prospect of TPG becoming a viable mobile network operator isn’t completely unrealistic.

TPG does have the expertise and the platforms (e.g. billing) in place to support an extended mobile business. And keeping those strengths in mind, McCormick says that TPG could potentially launch a limited MNO play, whereby it could incrementally build out a network in heavy usage areas. Outside those areas they would continue to use the Optus network on a wholesale basis.

If nothing else, TPG could always resell the spectrum, potentially to Vodafone Hutchison Australia, just in case its network is fixed before schedule.

With that in mind, what does the mobile landscape look like for consumers in the near term?

For starters, Telstra has now got the necessary ammunition to push ahead with its 4G plans and essentially serve its ever growing customer base.

The $1.3 billion spent at the auctions may have been below analysts’ expectations, but the 700MHz reserve price was set at around a 30 per cent premium to prices paid globally. That kind of pricing was always going to ensure that there would be some spectrum left unwanted. Although, it does make you wonder just how valuable the 700MHz is if the telcos are willing to leave it on the table. Evidently, they are willing to bide their time and use what they have to keep rolling out their existing services.

Optus should now have enough in the tank to stay in touch with Telstra. It will certainly be able to provide a viable 4G service to its regional and rural customers. 

As for Vodafone Hutchinson Australia, it has rightfully decided against spending any money, simply because it needs every cent to ensure that its network rehabilitation continues unabated. Failure here will certainly doom us to a Telstra-Optus duopoly and despite its best efforts VHA still has a long way in convincing the public that it’s up to the task.

VHA is of course banking on its substantial holdings of 1800MHz to buttress its network and, given things go to plan, it’s almost certain to participate in the next auction.

As for TPG, it has bought itself some valuable leverage, giving David Teoh a bevy of options as the mobile landscape gets ready for a post-NBN world.